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Slow recovery in the non-COVID business

Metropolis Healthcare (Metropolis) reported Q2FY22 performance was broadly in line with our estimates although recovery in the non-COVID business was slower than expected. Non-COVID revenue grew at 2-year CAGR of 7.9% driven by improvement in average realizations while volumes (no. of patients) were flat over the period. Overall, revenue grew 4.9% YoY to Rs3.0bn. EBITDA margin declined 170/150bps YoY/QoQ to 29.8%. Aggressive network expansion with focus on B2C, strengthening position in fast growing south region with Hi-tech acquisition, focus on increasing digital revenue and expectation of faster shift of market to organised players would help Metropolis’ growth to continue. We believe that current valuations are fair, hence, retain HOLD with a revised target price of Rs3,190/share (earlier: Rs2,866/share).

* Business review: Revenue growth was driven by continuous recovery in base business aided by higher realisation per patient offset by decline in COVID-19 test revenue. Realisation per patient (ex-COVID) improved 12.1% YoY to Rs976 with growing contribution of specialised tests and home collection. We believe non-COVID volumes would improve in the coming quarters and expect 27.0% YoY growth FY22E on a low base of FY21 with realisation increasing 9.2%. The tests per patient metrics remained stable at 2.11x. We expect this metric to gradually improve as share of B2C continues to grow. EBITDA margin at 29.8% dropped 150bps QoQ but was in line with our estimate. The drop was led by higher costs associated with commercialisation of new labs and collection centres. Company intends to add more centres in the forthcoming quarters which would keep the operating costs elevated in the near term. We expect EBITDA margin to remain at ~30% in FY22E-FY23E.

* Key Concall Highlights: 1) Company intends to add 15-20 labs and 250-300 centers in H2FY22 2) Home collection business to expand 100 centers in next 6months 3) Government business would be soft in Q3 4) cash stood at Rs5.5bn from which Rs3.4bn would utilised for High-tech acquisition.

* Outlook: Network expansion, Hi-Tech acquisition, growing digital revenue and shift of market to organised players would help Metropolis’ growth to continue over the medium term. We expect Metropolis to register revenue, EBITDA and PAT CAGR of 22.1%, 25.8% and 26.0%, respectively, over FY21-FY23E including acquisition of HiTech. RoE and RoCE would remain healthy at 32.3% and 23.0% respectively in FY23E.

* Valuation: We marginally alter the revenues and EBITDA estimates to factor in HiTech acquisitions and quarterly performance. Retain HOLD with a revised DCFbased target price of Rs3,190/share (earlier: Rs2,866/share) implying 54.0xFY23E EPS and 34.8xFY23E EV/EBITDA. Key upside risks: Increase in COVID-19 tests, faster than expected growth in non-COVID cases. Key downside risks: Higher-thanexpected competition and pricing pressures.

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